Do you know how much money your business is making each month? I was recently asked for a simple way to be clear on how much money my client's business was making and it led us down a bit of a rabbit hole in terms of what that actually meant. There are a couple of important stats you might want to keep track of for your business each month to help you understand how things are going, so here are the top three which I think can help you understand your business.
Tracking your sales in £ and units
It's a very good idea to have a target for how much you want to sell each month. The figure is probably a number in pounds and will partly be driven by making sure you've covered your costs and other commitments. It's useful to work out what that number means in terms of how many units of your product you need to sell or how many of each service you need to be selling from month to month. Knowing how many you need to sell is so much easier to work with than working towards an arbitrary value in pounds, and is particularly helpful if you haven't got a head for numbers.
If you're keeping your records in an accounting system you can run a simple Profit and Loss report each month to see the value of your sales and how that compares to your plan, the previous month and same time last year. But the number of units you sell might be something you prefer to track in a spreadsheet or on a piece of paper stuck to your fridge! Doing this will get you thinking about why the figure this month is better or worse than other periods and what changes you might want to make in your business to help you sell even more in future.
What's your gross profit?
Gross profit is an important figure because it tells you whether your products and services are profitable. It takes the sales price and the direct costs involved in making those sales and shows whether there was a profit before you take account of your more general business costs known as overheads. If you make a gross loss, you should really think about whether your product or service is viable and what changes you can make such as raising prices or reducing direct costs.
Your gross profit is another figure available in your Profit and Loss report and it's a number you should monitor closely. You might like to work out your Gross Profit Margin as a percentage calculated simply as Gross Profit / Sales x 100% and track it from month to month.
What about your net profit?
Net profit is going to tell you ultimately whether your business is profitable or not after considering all of your income and costs. Tracking your net profit will give you the best view of how profitable your business is overall.
Many businesses calculate a net profit margin and compare it to other businesses in the same industry to gauge how efficiently they're running their business in comparison to others, and net profit margin is certainly a ratio to keep a close eye on as you go through the year.
Where does cash flow come into it?
Cash flow is critical to running a business, so ensuring your bank balance is healthy is really important. Your bank balance alone doesn't tell you how profitable your business is though, it might not take account of bills you haven't paid yet, or clients who haven't paid you. So although you should be ensuring you're in the black, and that you can pay your bills when they fall due, you shouldn't rely on your bank balance alone to give you the full picture. Pay close attention to your sales and profit figures too.
Our monthly bookkeeping clients receive a monthly report which gives them key figures about their business. Spending some time reviewing those statistics regularly can really get you thinking about the trends in your business, what's going well, and changes you need to make. Taking it one step further to set forecasts and goals and to monitor your business's performance against that adds a whole other level to your understanding of your business. Talk to us about the services we offer growing businesses, we'd love to help.